Monday, July 15, 2024

Alibaba stock could double. Splitting fundamentally changes the evaluation.


Ali Baba

The plan to carve itself into six parts has been welcomed by investors who see it as a way to unlock value in the Chinese tech giant. Over the past two years, the stock has been hit by a wave of regulatory pressure.

On Wednesday, the stock rose another 2%, to just over $100, but still well below its record high of about $317 in October 2020.

“From the perspective of the impact of investor sentiment, we liken the reorganization of Alibaba to the transformation of Google into Alphabet

JP Morgan analysts, led by Alex Yao, wrote in a note on Wednesday. “However, we believe that the reorganization of Alibaba could have more significant impacts on business fundamentals and share price in the medium to long term.”

In the “blue sky scenario,” JPMorgan is watching the stock at $210 per share.

Announcement – scroll to continue

The restructuring should change the way analysts and investors view Alibaba shares. However, the reorganization is similar to turning from a conglomerate into a holding company, and Alibaba’s stock listings in Hong Kong and the US will not be affected – through American Depositary Receipts. The holding company will still exist, wholly own the core Chinese e-commerce business and will likely retain significant interests in any subsidiaries that go public.

Instead of using a valuation framework like forward price-to-earnings (P/E), investors will probably start valuing a stock as the sum of the parts (SOTP) — especially since there will be new clarity on affiliates if and when they go public. This would value elements of Alibaba’s business that might otherwise be swept under the rug when analyzing the multi-billion dollar company as a comprehensive technology conglomerate.

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“We believe that the investor valuation framework will shift from P/E to SOTP as news of IPOs floods into the market, resulting in a potential 100% upside in the share price,” said the JP Morgan team.

Announcement – scroll to continue

Others on Wall Street agree.

“With the announcement, we take a look at SOTP valuation using new business units, indicating parity with our $155 target,” the analysts, led by James Lee at Mizuho Securities, wrote in a note on Wednesday.

Mizuho Team’s bull case price target is $190. “We believe that only core and cloud commerce is priced in inventory, and operations such as food delivery, online video, and payments are free call options,” the analyst said.

Announcement – scroll to continue

The calculus change in evaluation is just one reason to like the plan. Investors also love that the reorganization should get Alibaba as well as motivate its tech peers around the world to do the same.

It should not be overlooked to note that the plan is being sent to Chinese regulators, whose nearly three-year crackdown on the technology sector has been the driving force behind the rapid decline in Alibaba shares. In its plan, Alibaba explained that the split was an attempt to increase competition.

“Separating units may help conglomerates reduce potential regulatory risk, unlock trapped values ​​at the conglomerate level, and reduce regulatory risk that discount conglomerates faced from regulatory risk,” Mark Hefell, chief investment officer at UBS Global Wealth Management, wrote in a note on Wednesday.

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Write to Jack Denton at [email protected]

Rosario Tejeda
Rosario Tejeda
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